5 Things To Know About Trump's Delay Of The Financial Adviser Rule
The Obama administration created a rule to protect millions of American workers saving for retirement. President Trump has delayed this so-called fiduciary rule, which requires financial advisers to put consumers' best interests ahead of their own.
A battle over the rule is likely to continue in the courts. In the meantime, here's what you need to know.
Today was supposed to be the day you knew you could trust your financial adviser
Monday was the deadline for the industry to comply with a new rule crafted by the Obama administration to protect Americans saving for retirement. Obama's economic team said everyday Americans are losing upwards of $17 billion a year from their retirement accounts because financial advisers have conflicts of interest that give them incentives to steer clients into mutual funds with excessive fees.
The rule requires advisers to stop that practice and to act in their customers' best interest. But Trump has delayed the rule for 60 days through an executive action. He has directed his administration to review the rule. The new administration may try to change the rule or get rid of it.
Expect a legal battle over this financial adviser rule
Just about every retiree and worker protection group in the country supports this "best interest" rule for financial advisers: AARP, AFL-CIO, the Consumer Federation of America, US PIRG and many others. And some of these groups say they will sue the administration if it moves to weaken or scuttle the rule.
"They can't rip this key safety protection for retirement savings away from the American people without having a substantial valid basis. And if they do, we'll see 'em in court," Dennis Kelleher, president of the nonprofit Better Markets, a Wall Street watchdog group, has told NPR.
Phyllis Borzi, a former assistant labor secretary, worked for eight years crafting this rule during the Obama administration. She says she's worried about the Trump administration's delay, but she says, "the courts are very reluctant to overturn a legitimately issued rule simply because of a change in politics."
Trump has already run afoul of the courts with other executive orders — judges have repeatedly blocked his immigration bans. So we may see the courts intervene here, too.
Financial advisers are different from doctors and lawyers
Many people think financial advisers are like doctors or a lawyers — you go to see them, and their legal responsibility is to help you and to put your interests first. But most financial advisers are not held to a legal standard like that. Instead, they're more like car salesmen. Financial advisers can get a bigger commission for selling you more expensive products — such as mutual funds with fees that are more than five times higher than lower-cost funds that invest in similar or even exactly the same mix of stocks. In this way, some advisers get paid more money for giving you bad advice and it's legal for them to do that. It wouldn't be legal anymore if this rule goes into effect.
Why the industry says this is a bad rule
Many big Wall Street firms don't like this rule. One argument against it is that it would make it too hard for advisers to make enough money when they work with people who haven't saved much yet.
Tim Pawlenty, the CEO of the Financial Services Roundtable, applauded the 60-day delay in a statement, saying it will allow time for the Trump administration to "begin its review of, and potentially revise or rescind, the rule."
Trump's top economic adviser Gary Cohn, a former president of Goldman Sachs, has also been critical of the rule, saying it limits consumer choice.
Still, supporters of the rule say none of these criticisms are new. In fact, four federal judges have already upheld the rule and found these criticisms to be flawed and unconvincing. Those rulings came in lawsuits the industry brought to try to get the courts to overturn the rule.
Without this rule in effect, how can investors get advice they can trust?
In recent years more investors are moving to so-called "roboadvisers." Many of these online companies have attracted world-class investment experts to put together well-designed and low-cost retirement portfolios for customers at a fraction of the cost of a traditional adviser. Basically, since it's all done online, and sometimes the phone, you're not paying fees to pay for your own personal financial adviser to have a nice house and a nice car. And these roboadvisers favor low-cost index fund investing so you're not paying for Wall Street mutual fund managers to have nice houses in the Hamptons either.
For decades, the dirty little secret of Wall Street has been that investing for retirement is pretty simple: Statistically you are much more likely to make more money over time if you invest in low-cost index funds and exchange-traded funds instead of paying mutual fund managers or brokers to try to pick stocks that will be "winners." Picking winners is just too hard to do and the research here is very clear. Roboadvisers embrace this approach. And with them, you don't have to worry about having an adviser charging a big commission to steer you into mutual funds with really big fees. So that conflict of interest disappears.
If you want to sit down with a real person for more complicated financial planning questions (What's the right way to save for my kids' college? Should I pay off student loans first or start saving for retirement first? Can I afford to buy a house this year?), experts recommend going with an adviser who is "fee-only."
That means you pay a straightforward fee (you can shop around to find an adviser who's not too expensive.) And again, you avoid the conflict of interest of an adviser who's getting paid commissions to steer you into one investment product over another.